The technique of using an IRA for charitable gifts works well when one or more of the following factors are present: (a) the client has no surviving spouse or is unlikely to have one because the spouse has a terminal illness; (b) the client has a spouse who owns a significant IRA of his or her own; (c) the client has loved ones whom the client would like to benefit from the IRA, but the client did not name any or all of them as beneficiaries before the client’s required beginning date (RBD); (d) the client would like children or grandchildren to benefit from the IRA and is charitably inclined but has no other assets to leave to charity; (e) the client and his or her spouse have no need to draw down the IRA for living expenses; or (f) the client is charitably inclined and is indifferent as to which assets in his or her estate will go to charity.

The Pre-RBD Client. If the client comes to you before his or her RBD, you should take the following steps. If the client has named a spouse, determine whether the client and spouse are still married and if the spouse is still alive. If a trust is the beneficiary, determine whether the client has gone through the "trust hoops" required under Prop. Treas. Reg. 1.401(a)(9)-1, Q&A D-5 and D-6.

If the client wants to make a gift to charity, establish a separate subaccount in the IRA for the charity.

If the client is married, the client should probably designate his or her spouse as the primary beneficiary of the IRA because a surviving spouse can roll over the assets of a decedent’s IRA and treat those assets as his or her own, allowing the surviving spouse to name new beneficiaries. If the client is not married and is likely to have a taxable estate, consider naming a charity as beneficiary of the IRA to reduce death taxes. Alternatively, divide the IRA into subaccounts, with enough in a charitable subaccount to ensure that no estate tax or a reasonable amount of estate tax is payable, and the remainder in subaccounts for children and grandchildren.

If both spouses have large IRAs, designate CRTs as IRA beneficiaries to ensure that the unitrust or annuity amount from the CRT will be available to the surviving spouse as an additional source of income for his or her lifetime. When the CRT receives the IRA, no estate tax will be due on account of the marital and charitable deductions. The distribution of the IRA to the CRT will be free from income tax because the CRT is tax exempt. When the surviving spouse dies, the IRA will not be treated as part of the surviving spouse’s estate for excess accumulation tax purposes.

Clients who do not plan to use the IRA as a source of funds for living expenses should consider naming a charity as beneficiary of their IRAs. If the client does not have a taxable estate and wishes to protect his or her surviving spouse’s potential long-term needs, a charity or CRT could be a secondary beneficiary for disclaimer purposes.

The Post-RBD Client. The post-RBD client generally has fewer options when an IRA owner dies after his or her RBD but before the entire IRA has been distributed. The remaining portion of the IRA must be distributed at least as rapidly as it was being distributed on the date of the owner’s death. If the client was recalculating his or her life expectancy, the IRA must be distributed by the end of the year following the year of the client’s death. If the IRA owner was not recalculating his or her life expectancy, the IRA beneficiaries can use the remaining years of the deceased owner’s life expectancy to take distributions.

If the client named his or her spouse as beneficiary and both client and spouse elected to recalculate life expectancies and the spouse is dead, then, at the client’s death, both the client’s and the deceased spouse’s life expectancies are zero under the recalculation method and the entire IRA must be distributed by the end of the year following the year in which the last of them dies. If a deceased couple’s children or grandchildren are the secondary beneficiaries, there will be a significant income tax payable after the client dies. The charity or the CRT solution may help reduce taxes. The client could also use a CRT if the client has remarried after the client’s RBD.

If the client wants to name a new beneficiary of a qualified plan (but not an IRA), be aware of the rules under the Retirement Equity Act of 1984 (REA), which require spouses to consent to beneficiary changes in some instances. If the client complies with the REA rules, review the choices that the client made on life expectancy recalculation. If the client has elected to recalculate, when the client dies the account must be distributed rather quickly. The lawyer is left with an analysis similar to the previous question: if a full charitable deduction is desired, consider designating a charity as the beneficiary. If the client wants to create an income stream for one or more individuals, the CRT may be appropriate.

Estate Administration Issues. If the client has made a pecuniary gift to a charity, the executor should not necessarily use IRA assets to fund the gift, because doing so will accelerate the built-in income tax and a charitable deduction may not be available for the estate. To the same extent, if the executor funds noncharitable bequests with the IRA, the IRD will be accelerated.

Excess Accumulation Tax. Effective January 1, 1997, the 15 percent tax on "excess retirement accumulations" was repealed. Accordingly, designating a charity to receive an IRA distribution after the client’s death will not cause this tax to apply.

Charitable Remainder Trust Legislation. If a client wants to designate a CRT as beneficiary, bear in mind the changes to CRT rules passed in 1997. Under these changes, a trust will not qualify as a CRT if it has a unitrust or annuity payout that exceeds, respectively, 50 percent of the annual net fair market value of the assets of the trust or 50 percent of the initial fair market value of the assets of the trust. Also, an annuity CRT will fail to qualify if the value of the remainder interest is less than 10 percent of the initial net fair market value of all property placed in the trust. A unitrust CRT will not qualify with respect to each contribution of property to the trust if the value of the remainder interest in such property is less than 10 percent of the net fair market value of such property determined as of the date the taxpayer contributes such property to the trust.

Conclusion. Charitable gifts can make sense for many clients and can alleviate some of the heavy taxes associated with estate planning for IRAs. Lawyers must be familiar with the technical rules governing distributions from IRAs, the estate tax charitable deduction, and CRTs before dispensing advice in this complicated area.

In addition, the accountant should take other precautions. Accountants should be aware of the implications of their record keeping and always obtain full disclosure from their clients of any circumstances that might lead to litigation, to enable them to advise their clients of the ramifications of certain reports.

Stephen P. Magowan is an associate with Gravel and Shea in Burlington, Vermont.

This article is an abridged and edited version of one that originally appeared on page 16 in Probate and Property, September/October 1997 (11:5).